14 April 1993 External T.I. 9300305 F - Allowable Business Investment Loss - Capital Losses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Paragraph 39(1)(c) of the Income Tax Act (the "Act")

This is in reply to your letter of January 4, 1993 requesting a technical interpretation on the application of paragraph 39(1)(c) to a particular fact situation.

As we understand it the husband and wife shareholders of a corporation (Corporation A) that has been actively engaged in the business of arranging and/or financing mortgages on the security of the underlying real estate propose a series of transactions that will result in the crystallization of allowable business investment losses arising from loans made by them to their corporation. The proposal involves the incorporation of a new company, the transfer of the entire mortgage portfolio of Corporation A, and the assumption of its bank indebtedness. Corporation A is left with only loan obligations to the shareholders. Corporation A would then acquire an operating business in order to meet one of the conditions of paragraph 39(1)(c) of the Act. You specifically ask that we confirm that the Act does not require a corporation to be a small business corporation when the debt is incurred but only when it is disposed of or deemed to be disposed of.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. In this connection, it should be noted that a ruling may not be given where the matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling. This could include issues involving carrying on of a business or whether or not a particular business is a small business corporation. Notwithstanding the foregoing, we have provided the following general comments.

Paragraph 39(1)(c) requires, in the case of a debt owing to a taxpayer by a Canadian-controlled private corporation, that the corporation be a small business corporation. This suggests that not only must the corporation meet the definition of "small business corporation" in subsection 248(1) of the Act at the time of the disposition or at any time in the 12 months preceding the disposition, there is also the presumption that in fact it must actually be or have been a small business corporation i.e., operated as a small business corporation. In this respect subsection 245(3) states in part that an avoidance transaction means any transaction that is part of a series of transactions, which series would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Thus, if you proceed with an application for an advance income tax ruling it may be necessary for you to supply a submission to establish that the particular series of transactions would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provision of the Act read as a whole.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert for Director Business and General Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch